Change is the only thing that is almost always constant. Organisations have to keep revamping their business strategies from time to time to grow their business and capture a greater share of their market. Adaptability to change and flexibility to change the operational model in response to market needs is a great strength. The insurance sector is no exception to this rule. In the last few years, the insurance sector has witnessed a lot of positive changes. The private non-life players have proved to be a threat to the national insurance companies as they are far too aggressive in winning orders and writing risks. Price cutting by the private companies has proved to be a major hurdle for national non-life insurers. IRDA has also played an effective role as the regulatory authority.
However, there is one area that IRDA really needs to think about. Dismantling of the TAC (Tariff Advisory Committee) may have been a hasty move. It should be possible to resurrect TAC by giving it a structure that is more contemporary and fit for purpose. The other area that IRDA needs to focus on is to overcome the avarice that dogs the health and motor insurance sector due to the insatiable greed of the stakeholders concerned. In this article, I shall focus on Motor Insurance alone but this does not mean that fraudulent health insurance claims are any less in number than that in motor insurance.
Motor Insurance and Unethical practices/behaviours
There is one illness for which no medicine can ever be discovered. This illness is called unethical behaviour. This sort of behaviour is most common in Motor Insurance apart from Health Insurance. All the basic principles of insurance like – “Uberrima Fides”(Utmost Good Faith), “ Principle of Indemnity”, “Principle of Insurable Interest” etc are relegated to the side lines with impunity. It is really a sorry state of affairs if one looks at the manner in which the claims are made in motor and health insurance defeating the basic purpose of insurance as a risk mitigating measure.
Insurance claims are not intended to make a profit out of the loss – they are a means to make good the loss in the most reasonable manner. However, in reality, all motor insurance claims have an element of fraudulence in them that is hard to miss. Majority of car owners are reckless in their driving habits as they feel that any damage to the vehicle will be taken care of by insurance even if the damage is a result of careless behaviour or wilful/malicious intent.
The Law and the Law-breakers
As per law (Motor Vehicles Act), every vehicle has to be compulsorily insured. The intention of the law is honest but the vehicle owners and garages and service stations use it as a means to earn money via claims. Where is the question of indemnity if there is wilful intent to allow the risk to occur so that a claim can be made? No wonder, the non-life insurers are bleeding when it comes to motor insurance claims. As a student pursuing insurance almost a decade ago, I have read about the number of claims pending in Motor Accidents Claims Tribunal. It appears that the situation has worsened now.
The private non-life insurers are far too aggressive about business growth, so they end up diluting underwriting standards in favour of writing more business regardless of the merits of the case. If this is their strategy, then there is no point in crying about mounting motor insurance claims. If the losses have to be avoided, then there is a need for revamping the pricing model in motor insurance.
An IT geek in Bangalore who earns a handsome salary is reckless while driving mainly because there is insurance cover for the vehicle. Does the insured not have duty or responsibility for taking suitable precaution to protect his vehicle from damage? The garage shops / service centres are thrilled when a vehicle is brought to them for maintenance.
In the service stations/ workshops, oil will be charged whether it is required for the vehicle or not, spare part expenses will be claimed whether those parts are needed or not – simply because there is an insurance cover for the vehicle. There is also no way to cross-check this and stem the rot. There are no benchmarks, no standard rates for repairs in service stations/ repair shops. Even if the workshops do have standard rates, who is to check their veracity and logic behind fixing those rates? Some service station personnel in Bangalore are so splenetic enough to claim that they shall not entertain vehicles that are covered by a particular insurer.
New Product Development in Motor Insurance
Due to the high level of moral hazard, a tighter claim control is needed. But is that enough ? Not at all. We have to look at this malaise holistically. Piece meal solutions won’t work.
Even the age old concepts like No claim discounts, depreciation allowance for new parts etc are just not enough. The entire risk pricing model for motor insurance needs a total revamp.
The insurance principle of contribution must be enforced in case of motor insurance. The claims cost must be shared equally between the insured and the insurer. There can be riders to it based on the earning capacity of the individual. Alternatively, the motor insurance premiums must be so structured that the share ratio between insured and insurer should change as the vehicle ages. This can be done progressively. For instance, a new vehicle can be insured where contribution in case of claims can be 20 (insured):80 (insurer). As the vehicle ages and is subject to wear and tear, the ratio can be tweaked so that insured vehicle owner’s share of contribution increases. This will propel the insured to take proper care of the vehicle. Another thought that emerges is – why not price the premium based on the earning capacity of the individual as an additional factor?
Premium should be calculated based on the type of the vehicle, the safety features in the vehicle, the experience of the driver, age of the vehicle, the defensive driving techniques learnt, the usage of the vehicle and also the geographical location. For instance, motor insurance written in metro cities should command a higher premium than that written in rural areas where the incidence of traffic congestion is low.
Periodic audits of repair workshops can be conducted by automobile experts who can be authorised by IRDA for carrying out this task. IRDA must regularly monitor the business parameters that govern underwriting norms to preclude price wars and dilution of underwriting standards. Many corporates train their contractors so that they are well-equipped to carry out the work as per the standards laid down by the corporate. Extrapolating this logic, we can work out a way of accrediting the service centre workshops of OEMs.
Considering the engineering talent available in India, IRDA should encourage more and more engineers to take up surveyor jobs either on a full time or on a free lance basis.
Designing of the product definitely needs a completely different approach. As we all know, vehicles are segmented in different categories like Mini/Micro, Compact, Sedan, Premium, Luxury etc. Going forward, it will be good to have a motor insurance product that is specific to a particular category of vehicle. Calculation of premium must be done on a scientific basis using the weighted points method where factors like age of vehicle, driver competence, earning capacity of the individual, type of vehicle, usage must be used to arrive at a computation of premium. Policy renewals must be made on a sound basis rather than using the archaic concept of “last year’s premium + 10%”
My personal opinion about insurance claims is that there are two ways to look at it. One way is to pre-empt the large claims by making the claims procedure more robust that leaves little scope for doubt. The other way is to work towards faster disposal of cases pending in the tribunal. But a proactive approach (the former method) is always a better one than a reactive one (the latter method), isn’t it ?
Networking with the automotive sector
The automotive industry is coming up with innovations galore and technological advancements in vehicle technology are ruling the roost. If a user can purchase a vehicle along with all the desired features, he can also pay a nominal amount towards the motor insurance premium and share the risk with the insurer.
One cannot help but look at the irony of the situation. The pollution from vehicles is creating havoc with our environment. Automobile OEMs are doing all that they can in terms of innovation and break through thinking to grow business and capture market share. OEMs are trying to be socially and environmentally responsible by introducing more environment friendly technologies. They are taking strategic actions to meet the evolving emission norms. Yet, the fact is that, despite infrastructure in India being more or less the same, the phenomenal growth in the number of vehicles that are being manufactured and sold is a grim reminder to the fact commerce and business clearly takes precedence over environment protection. Notwithstanding this, the non-life insurance sector needs to keep itself abreast with the technology trends sweeping the automotive sector.
OEMs that are using environment friendly technologies in their vehicles must be encouraged by insurance sector by way of suitable allowances in the premium. This may be a small step but can be a large contributor to create a sustainable future for the future generations. Networking with the OEMs is also a good strategy to take their support in accreditation of authorised service stations.
By and large, pricing of a risk is also determined by claims experience. But this is something that the insured will not understand so easily. Greater visibility on the pitfalls of making fraudulent claims must be created in the audio-video and print media.
The Final word
All said and done, the instances of moral hazard in motor insurance claims are something that insurers have to deal with. Intelligent ways need to be explored to short change the intentions of fraudsters. This is a tall order but not something that is impossible. As I have said before, one can always tackle the situation in a fire-fighting mode which is more of a reactive approach. But then this is not the right strategy. The key thing is to have a relook at the claims procedure and build a robust underwriting mechanism. New motor insurance products must be developed that are more contemporary and are in sync with the rapidly changing market dynamics and demographics.
A well-known scholar has remarked that problems are actually opportunities in disguise. Therefore, IRDA must guide the insurers in such a manner that the level of fraudulent claims in motor insurance is vastly reduced by proactive means and corrective actions taken at the right time.